Food Marketers and Consumers: Implications of Rationality Asymmetries for Food Choice and Health

David R. JustCharles H. Dyson School of Applied Economics and Management

Cornell University

Food Choice and the Rational Man

► Food policy is often designed based on the idea that individuals use information efficiently The consumer will use available information Can weigh the various consequences of their

actions Gives appropriate weight to vague or narrow

information

► Individuals make more than 300 food related decision each day Paying close attention to each would be a waste

of time We naturally fall back on heuristics, habits and

rules of thumb

The Implications of Heuristic Choice

►Heuristics are at best approximations They are subject to serious error under

the wrong conditions E.g., clean plate rule can be reasonable

under some circumstances and not in others

May represent misperceptions►The implication

The consumer makes systematic errors The consumer could be better off

►Cognitive costs are prohibitive

Implications of Heuristics

► Policymakers can make people better off Save people from themselves (?)

►We need to be careful to separate our preferences from theirs

►Could provide a justification for policymakers to impose their preferences

People may resist changes that make them better off

►My perceptions are still my perceptions

► Widens the set of policy tools Before: price, information, content regulation Now: Regulating decision context

Some General Principles

► Subtle factors can influence choice Suggestive names, lighting, shapes, colors,

image, etc. Marketers have used this to advantage

► In food decisions, much of the problem stems from not being able to monitor consumption Monitoring consumption requires cognitive resources Factors that make this task more difficult tend to increase

consumption Individuals distort perceived consumption proportional to

serving size Containers or packaging can make monitoring easier

► We are different people when we are distracted

An Extended Example: Portion Sizes and Purchasing

► A lot has been said about mega-sized portions Super-size me phenomenon Long literature documenting the increase in

portion sizes since the 70s Not just in restaurants, but also in home recipes

► What is a normal portion size anyway Soda can – 12 oz Starbucks – “Tall” 12 oz (no normative size) McDonald’s soda – “child” 12 oz (medium is 21

oz) McDonald’s coffee – “small” 12 oz (medium is 16

oz)

Normative Portion Sizes

► Food marketers put a lot of effort into these normative size names►E.g., Wendy’s offers a Single burger, Double,

Triple, a Jr. and a Double Jr. Deluxe (!)

► Why do food retailers use such normative language?

► Two possible motivations►Informational►Framing

Standard Models of Portion Size

►Economists propose that different sizes are used to price discriminate Some value higher quantity, others don’t Larger quantities are offered at a volume

discount Those who value more benefit from

discount Those who don’t benefit (weakly) from

smaller quantity being offered Profits increase

►Quantity determines utility

Quantity

►Fast Food and Cafeterias Sizes are usually on display Sizes are often posted next to the

normative names►What extra information could the

labels provide? Information about what others are doing? Information about what they want you to

buy?

Framing Effects►How we phrase the question affects

the answer (Tversky and Kahneman)

►If Program A is adopted, 200 people will be saved (72%)

►If Program B is adopted, there is a 1/3 probability that 600 people will be saved and another 2/3 probability that no people will be saved (28%)

►If Program C is adopted, 400 people will die (22%)

►If Program D is adopted, there is a 1/3 probability that nobody will die and 2/3 probability that 600 people will die (78%)

►Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, whish is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimate of the consequences of the program are as follows:

Framing Effects

► People measure utility against reference points Lower marginal utility for gains than for losses Ratio about ½

► Benartzi and Thaler find evidence in stock prices

► Tversky and Kahneman suggest that framing impacts are prevalent in consumption decisions.

► Normative size names could establish a reference point Regular is the status quo Upgrades above not as valuable as downgrades

below

A Model of Framing Sizes

► Suppose individuals solve

► Subject to► Where

X is a vector of quantities purchased C is the set of available quantity choices

(including origin) p (x) is price (possibly nonlinear) θ is a vector of quantities given the normative

label

max |U x

xC

y p x x

A Model of Framing Cont.

►Loss aversion implies

| 0i

U x if 0ix

1 2| |i ix xU U x x 1 2if i i ix

| 0i

U x if 0ix

| 0j ixU x if i j

Implications of Framing

►Claim 1: Let x be any positive consumption quantity available for consumption good i and suppose that the individual displays loss averse preferences. Increasing the reference point must decrease the willingness to pay for x.

Implications of Framing

►Claim 2: Let be any two consumption quantities for a consumption good i and suppose that the individual displays loss averse preferences. If , then increasing θi will increase the willingness to pay for relative to .

x x

,i x x

x x

Implications of Framing

►Claim 3: Let be the only two positive consumption quantities available for consumption good i and suppose that the individual displays loss averse preferences. Changing the reference point from to

may decrease the probability of purchasing either or .

x x

i x

i x

ix x ix x

Framing

►Three hypotheses Increase norm – ambiguous change in

probability of purchase (unless only other choice is 0, then decreases)

Increase norm – increase the WTP to upgrade

Increase norm – decrease WTP for all sizes of goods

►Implication for managers Decrease normative sizes.

Our Experiment

►Subjects were recruited for a lunch experiment Cornell Students Conducted at one of the campus dining

facilities►Paid $15, they purchase lunch and

keep the change►Items include spaghetti in meat sauce,

salad, pudding, rolls, soda and water.

Our Experiment

►Two different sizes were offered (one twice as large as the other) for Pudding Spaghetti Salad

►Sometimes the sizes were labeled “Half” and “Regular”

►Sometime they were labeled “Regular” and “Double”

Part I: An Auction► 45 Participants (20 Regular/Double, 25

Half/Regular)► All viewed the items before bidding► We ran a special nth price auction for each

multiple sized item Asked for their maximum willingness to pay for

the smaller Asked their maximum additional willingness to

pay for the larger

► 15th highest bid determines sale price of the larger

► 3rd lowest bid determines the smaller

Demographic InformationVariable HALF DOUBLE Z-Stat

Gender (1 = Female)

0.53 (0.51) 0.42 (0.51) 0.641 (0.52)

Height (inches) 67.9 (4.3) 67.9 (5.1) 0.175 (0.86)

Weight (pounds) 145 (26) 147 (25) -0.095 (0.92)

Age 19.3 (1.2) 19.7 (2.2) -0.033 (0.97)

Average Bids by Treatment

Variable HALF Mean

DOUBLE Mean

Z-Stat (P-Value)

N = 25 N = 20 Small Spaghetti*** $1.07 (1.06) $2.18 (1.02) -3.400 (0.00) Large Spaghetti*** $1.67 (1.60) $3.50 (1.82) -3.378 (0.00) Small Salad** $0.71 (0.98) $1.18 (0.78) -2.428 (0.02) Large Salad** $1.08 (1.33) $1.71 (1.06) -2.199 (0.03) Small Pudding** $0.44 (0.40) $0.89 (0.71) -2.288 (0.02) Large Pudding*** $0.62 (0.63) $1.53 (1.02) -3.087 (0.00)

d Spaghetti** $0.63 (0.68) $1.31 (1.25) -2.539 (0.01)

d Salad** $0.37 (0.51) $0.58 (0.35) -2.167 (0.03)

d Pudding*** $0.18 (0.31) $0.64 (0.53) -3.406 (0.00)

Average Treatment Effects(Controlling for Demographics)

Variable Model 1 Model 2 Small Spaghetti $1.13*** (0.33) $1.11*** (0.36) Large Spaghetti $1.82*** (0.55) $1.86*** (0.62) Small Salad $0.39 (0.31) $0.29 (0.37) Large Salad $0.38 (0.42) $0.21 (0.48) Small Pudding $0.43** (0.18) $0.36* (0.20) Large Pudding $0.84*** (0.28) $0.76*** (0.29)

d Spaghetti $0.68** (0.32) $0.75** (0.35)

d Salad $0.05 (0.16) $0.01 (0.17)

d Pudding $0.41*** (0.15) $0.40** (0.16)

Change in WTP for Larger Size

CDF of BidsC

um

ula

tive

Pro

ba

bili

ty

Bid for Small Spaghetti0 5

.05

1 0 1

CDF of BidsC

um

ula

tive

Pro

ba

bili

ty

Bid for Large Spaghetti0 8

.05

1 0 1

CDF of BidsC

um

ula

tive

Pro

ba

bili

ty

Bid for Spaghetti Upgrade0 6

.1

1 0 1

Interpretation

► There are substantial incentives to name the sizes correctly Total bids increased from $3.37 to $6.97 (P =

0.00)

► The effect was much stronger for the hedonic item Salad increased in price by 66% and 60%

respectively Pudding increased by 102% and 147%

respectively Spaghetti increased by 105% and 108%

respectively

►Note on size of bidding pool

Interpretation

►All bids increase with smaller normative size This is not consistent with LA

►Bids for larger sizes are bigger for regular to double than for half to regular This is also inconsistent with LA

►Hunger attenuates significance (somewhat) Visceral effects (Loewenstein)?

Part II: Cafeteria Purchasing

►134 participants►Same foods and conditions►Participated for 2 weeks

First week only the regular Second week only the half or the double

►Some participants participated only in some weeks Allows us to check for order effects (none

detected)

Cafeteria Prices

► Small Spaghetti$2.50

► Large Spaghetti$3.50

► Small Salad$1.50► Large Salad$2.00► Small Pudding

$1.50► Large Pudding

$2.00

► Roll $0.50► Pepsi $1.00► Ginger Ale $1.00► Water$1.00

Consumption BehaviorVariable HALF DOUBLE Z-Stat

(P-Value) Large Only

Spaghetti Waste*** 2 (27) 20 (53) 5.348 (0.00) Salad Waste** 7 (19) 3 (17) 2.435 (0.01) Pudding Waste 22 (71) 11 (52) 1.346 (0.18) Total Calories Consumed***

463 (231) 325 (235) 2.854 (0.00)

Proportion Purchasing Spaghetti*** 0.705 (0.459) 0.302 (0.463) 4.259 (0.00) Salad 0.312 (0.466) 0.434 (0.500) -1.420 (0.16) Pudding 0.169 (0.377) 0.113 (0.320) 0.879 (0.380) Rolls 0.573 (0.497) 0.566 (0.499) 0.093 (0.93) Soda 0.417 (0.496) 0.447 (0.501) -0.403 (0.69) Water 0.563 (0.499) 0.658 (0.478) -1.267 (0.21)

Small Only Spaghetti Waste*** 7 (27) 18 (42) -3.03 (0.00) Salad Waste** 1 (13) 3 (10) -2.265 (0.02) Pudding Waste** 6 (25) 14 (41) -1.986 (0.05) Total Calories Consumed***

231 (139) 305 (146) -2.65 (0.01)

Proportion Purchasing Spaghetti** 0.413 (0.495) 0.632 (0.487) -2.519 (0.01) Salad 0.375 (0.487) 0.421 (0.498) -0.542 (0.588) Pudding 0.163 (0.371) 0.228 (0.423) -0.961 (0.34) Rolls*** 0.469 (0.502) 0.697 (0.462) -2.999 (0.00) Soda 0.354 (0.481) 0.474 (0.503) -1.580 (0.11) Water 0.500 (0.503) 0.579 (0.497) -1.028 (0.30)

Controlling for Demographics

Variable Model 1 Model 2 Large Only

Spaghetti Waste -86*** (18) -82*** (20) Salad Waste -5 (3) -7** (3) Pudding Waste -18 (12) -3 (14) Total Calories Consumed

-102** (46) -83 (53)

Small Only Spaghetti Waste 13** (6) 12* (7) Salad Waste 1 (2) 1 (3) Pudding Waste 8 (7) 10 (8) Total Calories Consumed

76*** (25) 58** (28)

Change in Average Calories

Percent Purchasing

Interpreting

► People consume more calories when we call it a regular 32% or 36% depending on size

► Probability of purchase goes both ways (only significant up when regular) Seems to depend on type of dish LA says decreases

►People use size names to determine how much to leave!

Implications

► Willingness to pay responds to normative language Significant increases in WTP by lowering norm

(like a social norm) Upgrades more valuable above the norm

(violates LA, also inconsistent with social norms) “Regular” increases purchase only for some

foods (like loss aversion)

►Do we need another model? Maybe the label is informative

Labels as Information

► Individuals respond poorly to visual cues Can’t estimate size well (tall vs. short) Respond to plate and utensil size We eat with our eyes (soup bowls)

► What if people use names as a crutch I know about how much I am willing to pay for a

“regular” – but adjust for perceived size Double that for a double (with some adjustment

downward) Halve it for a half (with some adjustment

upward)

►Might explain the plate waste

Implications for Retailers

►Higher WTP for larger names may encourage larger and larger portions Credibility issues may lead to a treadmill

►Responds like an anomaly Exacerbated by stress, hunger,

distractions Thus, normative sizes more effective in

fast food or convenience food What about more hedonic food?

Factors Affecting Food Choice

► Cognitive Experiential Self Theory (Epstein, 1993) Two systems used to evaluate every stimulus Experiential system makes snap judgments based on affect Cognitive process makes deliberative evaluations based on

rational thinking Processing resources (time, stress, distractions) determines

which rules► When resources are few, convenience, affect, and

salience dominate► When resources are many, prices and health

information► Hedonic vs. utilitarian foods

“wants” vs. “shoulds” More willing to acquire a should than give up a want Significant reactance

ConsumptionDecision

Visceral Factors (hunger)Mental food accountsCommitmentSocialization

Cognitive(Low Impact)

Affective(High Impact)

PricePrice of Substitutes and ComplementsAttributes (calories, nutrients)Health Information

PreferencesWealth

EffortSalienceStructureSize of portionsHedonic (Salt, Fat, Sugar)AtmosphereEffort/AvailabilityDistractionsSize of portionShape of containers

Habit

Individual Control

Primitive

Manufacturer Control

Consumption and Control

The Role of Marketing

► Individuals control some of the important factors► Food manufacturers, retailers and marketers control

the majority of factors► Hence, consumption decisions (food and amount)

are the result of a game between manufacturers and consumers Consumers are not entirely aware of their

behavior Marketers are!

►Or maybe just behave ‘as if’► This is a mechanism design problem

Could result in a loss of wellbeing due to incomplete or asymmetric information

Does asymmetric rationality work the same way?

The Consumer► The consumer problem can be represented

as

► Where ϕ is the level of cognitive resources determined exogenously At least the individual isn’t aware of how their

actions affect it

► The variable s is an external cue that influences choice, like portion size

► The variable q is the choice variable (e.g., quantity) that influences utility (taste and health)

,

max 1 |s

c a sq Q s S

U u q u q s p

Food Manufacturers/Retailers

►Food sellers wish to maximize profits To do this they choose the available cues

(S ), prices and the available choices (QS ) Of course sellers may respond to

heuristics also►I assume that over time they happen

upon the profit maximizing choice sets They behave as if they know the

consumer’s active preferences

A Model of Food Transactions

►The producer solves

subject to

►Here k is the unit for which the individual is charged Package size, or quantity consumed, etc.

, ,max ( , ) ,

s ss

S Q pp k q s c q s

,

max 1 |s

c a sq Q s S

U u q u q s p

Asymmetry of Rationality

►The seller knows she will receive

►The consumer behaves as if there is probability ϕ of receiving

and probability (1- ϕ) of receiving► In actuality the consumer always

receives

* ( *, *) *, *sp k q s c q s

* *c su q p

* | * *a su q s p

* *c su q p

The Impacts of Heuristics

►Let

Heuristics are non-trivial if

►The most important points: Consumers are not the only ones who

respond to policies Consumers do not always respond as

expected

,

( , , ) arg maxs

s s c sq Q s S

q Q S p u q p

( , , ) *( , , )s s s sq Q S p q Q S p

Is it Always Better to be Rational?

• The impact on overall welfare also depends on how the heuristic preferences impact profit. • Suppose for instance that individuals are

charged for q, costs are monotonic in q and that s is costless (~ denotes fully rational eq)

• There are 4 potential cases comparing to fully rational equilibrium

• Depends on the relationship of ? * * ? *c cu U U u c c

An Example: Portion Size

►As a simple example, suppose we consider the portion size problem

►Subject to

,

maxs p

p c s

* *min , , 1 min , , |c au q s p s u q s p s s p U

An Example: Portion Size

►Increasing distractions increase portion size, iff

►If marginal affective utility is larger than cognitive utility Affective here refers to the deviation from

ex post wellbeing

0ds

d

' | |c a au s u s s u s sq s

Sin and Virtue

►This leads us to define two different types of foods Virtuous

(marginal affective utility lower) Sinful

(marginal affective utility higher)

► Consumers over consume sinful foods and under consume virtuous foods

' | |c a au s u s s u s sq s

' | |c a au s u s s u s sq s

Sin and Virtue

►Result 1: As cognitive resources decrease, portion sizes will increase more for more sinful foods and could decrease for virtuous foods We should see some separation

►Result 2: As cognitive resources decrease, uniformly more sinful foods will be marketed Hard to market health as convenience

food If marketing sinful foods, you want to

encourage distraction

Sin and Virtue

► I will present some graphical examples using sinful foods Many things flip when we examine virtuous foods I will comment on how this changes things

without showing the graphs

► Graphs assume linear costs, and a strong version of sinful Cognitive arg max is lower, and maximum is

lower Much more richness if this is not the case, but

the simple model demonstrates how unintended consequences can happen

0 2 4 6 8 10 12 14 16 18 200

10

20

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AffectivePerceived UtilityCognitive

Portion Size

Money M

etr

ic U

tility

0 2 4 6 8 10 12 14 16 18 200

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20

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80

90

100

ProfitCognitiveAffective

Portion Size

Pro

fit

Taxing Size

►The constraint now becomes

►In equilibrium, ►Producers lose out on profit

Loss must be greater than ts►Consumers welfare will improve if

sinful, and

* *min , , 1 min , , |c au q s p s u q s p s s p ts U

0 2 4 6 8 10 12 14 16 18 200

10

20

30

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ProfitWith Tax

Portion Size

Pro

fit

0 2 4 6 8 10 12 14 16 18 200

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20

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AffectivePerceived UtilityCognitive

Portion Size

Money M

etr

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tility

Welfare: Taxing Large Portions

► Producers will always perceive a loss of Profit

► Consumers will too if any surplus shared This will be unpopular with all involved in the

transaction

► May or may not increase consumer welfare Depends on how sinful the food is Reactance can also either increase or decrease

welfare

► Incentive to reduce cognitive resources persists If they can influence this at some cost, the

equilibrium will be lead closer to the non-regulation

Welfare: Subsidizing Large Virtuous Portions

►Profits to the firm increase►Consumers may also if surplus is

shared Thus this may be a very popular program

with all involved in the transaction►Will always increase consumer welfare►Incentive to increase cognitive

resources persists►Food may go to waste if subsidy

exceeds decline in perceived utility

Regulating Context

►Suppose instead we considered regulating context Naming of portion size? Requiring an important cognitive cue

►Suppose we could shift the perceived utility closer to the cognitive utility Could try to increase cognitive resources

(distractions) Could try to alter affective utility function

(names, atmospheric cues)

0 2 4 6 8 10 12 14 16 18 200

10

20

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AffectivePerceived UtilityCognitive

Portion Size

Money M

etr

ic U

tility

0 2 4 6 8 10 12 14 16 18 200

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20

30

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ProfitCognitiveAffective

Portion Size

Pro

fit

Welfare: Regulating Context Cues

►By increasing cognitive resources Profits decrease Consumers may still perceive they are

better off if surplus is shared ►More likely the larger the shift in perception

►Consumer will be better off if small change

►If instead, shifting the affective curve Profits may increase This may be more politically feasible

Regulating Context for Virtuous Foods

►Increasing cognitive resources and/or reshaping the affective curve will Increase profits Increased consumer perceived welfare if

surplus is shared Thus this would be popular with actors

►Consumer will be better off

Conclusion

► Ignoring behavioral economics won’t make it go away Even very traditional policies may interact with

behavioral cues ►Could make policies ineffective or even self defeating

► Regulators may be able to use behavioral cues to create much more promising policy options Policies that potentially improve profits and

welfare Such creative solutions have proven to be very

effective in some contexts Could also allow win/win solutions Need to know what we cannot observe